Housing Is Still ‘Shadowed’ by Excess Supply

ByKathleen Madigan

Home demand took a step forward in February. But oversupply remains a problem.

Bloomberg News

Sales of existing homes dipped in February to an annualized rate of 4.59 million. But the drop reflected an upward revision to January sales, rather than a sign of weakness. Compared to a year ago, resales were up 8.8%.

The uptrend in sales over time has whittled down the number of homes for sale. According to the National Association of Realtors, the inventory of homes for sale is equal to a 6.4 months’ supply at the current sales pace, an improvement from 8.6 months a year ago.

But that doesn’t mean housing has overcome its oversupply problem. The market still faces a shadow inventory of millions of homes whose owners will put them on the market once conditions look more stable.

Mortgage information tracker CoreLogic calculates homes that are seriously delinquent, in foreclosure or already owned by lenders constituted a pending inventory of 1.6 million units in January.

What’s disturbing is that little headway in the number of homes just waiting on the sidelines. Although about 3 million distressed sales have taken place over the past three years, “the shadow inventory in January 2012 is at the same level as in January 2009,” the CoreLogic report says.

Some of those homes will enter the market during the upcoming important spring selling season. The potential overhang means more selection for buyers–but at the cost of further downward pressure on prices.

Given the drop in prices already seen over the past 5 years along with dirt-cheap mortgage rates, affordability is much less of a problem than it was just a few years ago. Real estate website Trulia calculates that buying a home is cheaper than renting in 98 of 100 U.S. metro areas even when expenses like insurance and taxes are included.

Yet even as owning wins out financially, home demand still remains far below what history suggests given the recent formation of new households.

“Many people cannot afford a downpayment or qualify for a mortgage,” says Trulia’s chief economist Jed Kolko. “High unemployment and credit tightening during the recession have sidelined many people from considering homeownership.”

Housing has made progress. But the most powerful catalyst for better housing demand remains stronger income growth. Solid job growth is a Realtor’s best friend.

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